Trade BarriersQuotas

Sanctions

Tariffs

Subsidies

WHY TRADE BARRIERS?

WHAT TRADE POLICY IS BEST FOR AMERICANS?

Trade Options

• Free Trade

• Protectionism

• Fair Trade

Free Trade

• No Barriers• Advantages - cheaper and more variety for

consumers, more goods - ppf out, countries that trade together- stay together

• Disadvantages - domestic unemployment, difficult for young industries, dependency on foreign goods

Protectionism

• Creates positive condition for domestic industry by limiting their competition

• Advantages- good for young industries, domestic jobs, military need for certain goods (steel), even playing field

• Disadvantages- retaliation, does not develop foreign markets, drives domestic goods up in price for consumers

Fair Trade

Essentially blackmail- we will trade with you if….

• Advantages - uses trade to make world a better place, even playing field

• Disadvantage - resentment, retaliation

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Wheat (tons) Wheat (tons)

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Tradingpossibilities line

Tradingpossibilities line

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Balance of payments

• The balance of payments (or BOP)

• Payments received by U.S. and payments sent by U.S. to other countries. Total of in a given year

Components of balance of payments

• BALANCE OF PAYMENT =

Current account +

Capital (financial) account +

change in Official Reserves

Current accounts• The current account is the sum of net sales from trade in

goods and services, net factor income (such as interest payments from abroad), and net unilateral transfers from abroad

• Positive net sales from abroad corresponds to a current account surplus; negative net sales from abroad corresponds to a current account deficit. Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports.

• Import / export payments

• Current Account =

Trade Balance (net exports) +

Net Factor Income from abroad (like interest and dividends) +

Net Unilateral Transfers from Abroad

(like foreign aid, grants, etc.)

Capital Account The capital account used to entitle the section now familiarly

known as the financial account. This section usually includes special debt transactions between nations and migrants' goods as they cross a country's borders. This is where you would find asset transactions. (Investors who buy assets in our country or us buying assets in another country)

Flow of investment funds in and out of a country

U.S. buys their assets (negative to our capital acct.)

They buy U.S. assets (positive to our capital acct.

Official reserves

• The official reserve account records the government's current stock of reserves. Reserves include official gold reserves, foreign exchange reserves, and IMF Special Drawing Rights

• Additions and subtractions of foreign currency.

Balance of Payments

• The fact that it is called a “balance” of payments means that the two columns must equal in the end. Hence a +/- in one column must be offset in the other column